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Factors Affecting Regional
Economic Performance in Canada
Brigid Brady, Ontario Regional Office and Farid Novin, British Columbia
Regional Office
• Over the past year, economic activity in uring the second half of last year and the
Canada has slowed, with some regions first half of this year, Canada’s economy
experiencing more pronounced effects than Dwas hit by three major shocks that affected
others. The downturn in the U.S. economy, the country’s regions very differently. 1 On
high energy prices, and low lumber prices balance, these shocks have contributed to considerable
affected Canada’s regions to varying degrees. slowing in economic growth. This slowing will be
exacerbated in the near term by the September terror-
In Ontario and Quebec, there was a sharp ist attacks in the United States.2 In this article, the three
slump in the automotive, electrical, and shocksareanalyzedfromaregionalperspective,high-
electronic manufacturing industries. In lighting Canada’s regional economic diversity.
contrast, a surge in energy prices contributed The first shock was the slowdown in U.S. economic
to economic strength in Alberta, Atlantic growth late in 2000, which significantly affected pro-
Canada, and, to a lesser extent, in British duction levels and exports of automotive and electri-
Columbia, where problems in the forestry cal and electronic manufacturing products in Canada.
sector adversely affected activity. This was followed by unexpectedly high energy
prices, exacerbated by energy shortages in the United
• Manufacturing and lumber exports States, which gave rise to increased exports of natural
weakened, while energy-related exports and gasandelectricity,togetherwithasurgeininvestment
investments remained strong. The consumer projects in this sector. The third shock was the uncer-
sector, bolstered by easing monetary policy, tainty created by the expiry of the Softwood Lumber
Agreement. A preliminary 19.3 per cent countervail-
tax cuts, and high levels of employment, ing duty was subsequently imposed on Canadian
contributedtogrowthineveryregionbetween lumberbytheU.S.DepartmentofCommerce.Volatile
mid-2000 and mid-2001. market conditions prevailed in the forestry sector,
• Surveys conducted by the Bank’s regional where export and production levels declined.
offices indicate that inflationary pressures In addition to these three shocks, regional economies
have eased since March 2001, although there felt the effects of a prolonged drought that affected
is some variation across regions. agricultural crops across the country. This was
1. The regional breakdown used for this article corresponds to the areas cov-
eredbytheBank’sfiveregionaloffices:AtlanticCanada,Quebec,Ontario,the
Prairies (includes the Northwest Territories and Nunavut), and British
Columbia (includes the Yukon). For more information on the activities of the
regional offices and the quarterly survey of business conditions, see Amirault
and Lafleur (2000).
Note: The cut-off date for data used in this article was 2. For a more detailed analysis of recent developments in the Canadian and
28 September 2001. U.S. economies, see the Monetary Policy Report to be released on 7 November.
BANKOFCANADAREVIEW • AUTUMN2001 21
particularly important to the economy of the Prairie would be more exposed to external shocks that affect
provinces, where most of the impact on wheat and the automotive sector if its production is highly con-
canola crops will be felt in 2002, when supplies will centrated in that sector.
likely be low. In Ontario and Quebec, the manufacturing sector
accounts for over 20 per cent of provincial output
(Table 1). Within this sector, the automotive industry
Because of the striking variation in is of key importance in Ontario, representing about
industrial activity from region to 6percentofprovincialoutputand46percentoftotal
exports (Table 2). The electrical and electronic equip-
region, shocks that affect Canada’s ment industries also figure prominently in Ontario.
nationaleconomymaybeexperienced In Quebec, machinery and equipment account for
more or less intensely in each region. 35 per cent of provincial exports, reflecting the impor-
3
tance of the aeronautics industry in that province.
TheenergysectorisespeciallyimportantinthePrairie
provinces, representing 43 per cent of the region’s
Because of the striking variation in industrial activity exports, with production activity concentrated in
from region to region, shocks that affect Canada’s Alberta. In Atlantic Canada, the energy sector has
national economy may be experienced more or less accounted for 21 per cent of total exports over the last
4
intensely in each region. Regional business cycles can five years, but this share has been expanding. At
therefore diverge significantly from national cycles 54 per cent of provincial exports, forestry predomi-
bothindurationandseverity.Forexample,becauseof nates in British Columbia.
the importance of the energy sector in Alberta, and its Thus, the economies of Ontario and Quebec exhibit
growing prominence in Atlantic Canada, the Prairie the strongest reactions to negative external shocks to
and Atlantic regions are highly sensitive to fluctua- the manufacturing sector, while the Prairies and
tions in the market for energy products. Information
oneconomicdevelopmentsacrossregionscanprovide
additional insights to those derived from national Table 1
data. A sound understanding of regional business Regional Sectoral Mix
cycles is thus a valuable input in formulating mone- Average share of output from 1995 to 1999, per cent
tary policy. British Prairies Ontario Quebec Atlantic Canada
Regional business cycles are typically studied in the Columbia Canada
absenceofregionalGDPdata,whichareavailableonly Primary 6.6 18.5 2.1 2.9 5.9 6.3
with a long lag. The indicators analyzed include total Mining, quarrying,
employment, retail sales, housing starts, and the con- and oil-well-
sumer confidence index. The Bank’s regional offices drilling industries 2.7 14.2 0.8 0.8 2.8 3.8
alsoconductquarterlysurveysofbusinessconditions, Logging and
forestry 2.6 0.3 0.2 0.6 1.0 0.6
which provide additional information that is helpful Manufacturing 9.6 9.5 23.4 20.2 10.5 17.5
in gaining a better understanding of recent economic Transportation
developments in Canada. In this article, the three equipment na 0.6 5.7 2.3 na 3.1
shocks that affected the Canadian economy over the Electrical and
past year are analyzed from a regional perspective, electronic products na 0.6 2.2 1.6 na 1.5
Goods-producing
starting with a discussion of the sectoral mix of industries 25.8 38.7 33.0 33.0 26.2 32.8
each region. Services-producing
industries 74.2 61.3 67.0 67.0 73.8 67.2
The Sectoral Breakdown of Canada’s Source: Statistics Canada; output measured by real GDP at factor cost (1992=100)
Regions: Some Stylized Facts
The relative size of the various economic sectors is 3. Aircraft are Quebec’s top export.
important in determining the intensity of a region’s
response to an economic shock. For example, a region 4. Atlantic Canada increased energy exports from 17 per cent of the region’s
exports in 1995 to 29 per cent in 2000.
22 BANKOFCANADAREVIEW • AUTUMN2001
Table 2 decline in demand. As the demandforautomobilesin
Share of Total Goods Exported the United States fell off, Canadian exports declined.
Average from 1995 to 1999, per centa The unintended accumulation of North American
British Prairies Ontario Quebec Atlantic Canada automobile inventories that resulted led to a marked
Columbia Canada cutbackinCanada’sproductionofmotorvehiclesand
Agricultural and parts. Automobile production in the first quarter of
fishing products 6.3 21.3 3.6 4.4 22.5 7.9 2001 declined by about 30 per cent, and exports of
Automotive motor vehicles and parts fell by about 27 per cent.
products 2.3 1.5 45.5b 7.1 0.4 24.7 Giventheimportanceofitsautomotivesector,Ontario
Industrial goods experienced these developments most intensely. A
c
and materials 13.0 16.0 17.0 25.5 12.3 17.8 similarpatternoccurredintheelectricalandelectronic
Machinery and
equipmentd 9.6 9.9 23.5 35.2 11.0 21.3 components sector, where the decline in U.S. demand
Forestry 53.7 6.5 4.6 18.3 30.1 13.2 for computers and telecommunications equipment in
Energy 11.7 42.8 0.8 1.9 21.2 10.4 the second half of 2000 led to a sharp reduction in
Other 3.4 2.0 5.0 7.6 2.5 4.7 Canadianproductionoftheseproductsearlythisyear.
Foreign exports as This reduction had the largest impact on Quebec and
percentage of b Ontario. Exports of telecommunications equipment
regional output 28.6 31.9 46.0 31.8 27.0 37.1 from both provinces had grown rapidly throughout
2000, but in the first quarter of 2001, they declined by
a. Note:Althoughmorerecentexportdataareavailable,thistimeperiodwaschosentobe 36 and 24 per cent in Quebec and Ontario, respec-
consistent with Table 1. With the exception of “Foreign exports” in the lower panel, pro- tively. Exports in this sector continued to decline in
vincial exports include international and interprovincial trade.
b. The automotive sector accounts for more than half of Ontario’s exports to the United the second quarter of 2001.
States. About 90 per cent of Canadian automotive production is exported, and about
80 per cent of Canadian automotive purchases are imported. TheslowdownintheU.S.economyhasbeenfeltmore
c. Includes mining broadly in the economies of Ontario and Quebec. In
d. Includes electric and electronic products Ontario, employment growth has been sluggish for
Source: Statistics Canada mostof2001,withdeclinesinrecentmonths(Chart3).
Although consumer confidence has declined in
Atlantic provinces are most sensitive to changes in Ontario (Chart 1), the housing market has remained
energy demand. Ontario’s economy is the most vul- strong, and retail sales are positive. Investment levels
nerable to changes in external demand, since foreign were fairly flat in 2000, but some improvement in
exportsmakethemajorcontributiontothisprovince’s investment intentions is expected for 2001 (Charts 5
5 and 6) (Statistics Canada 2001). In Quebec, the promi-
GDP. Moreover, given the solid interprovincial trade nence of the aeronautics and pharmaceutical indus-
links in Canada, an economic shock to one province tries has been a stabilizing factor. Employment has
would be transmitted to other provinces (McCallum grown in 2001, following a decline in the pace of
1995). expansion in 2000. Buoyed by strong consumer confi-
Shocks to Canada’s Economy during dence, housing markets and retail sales have been
the Second Half of 2000 and the First firm in 2001.
Half of 2001 The second major shock was the unexpected rise in
energy prices. The price of crude oil, as measured by
TheslowdownintheU.S.economyinthesecondhalf the West Texas Intermediate benchmark, rose to
of 2000 and the first half of 2001 affected all regions of US$34.52 per barrel in November 2000, almost 38 per
Canada adversely but with varying degrees of inten- cent higher than a year earlier. The price remained rel-
sity. The automotive industry and the electrical and atively highinthefirsthalfof2001,butthensubsided,
6
electronic manufacturing industries were the sectors and was about US$27 per barrel in early September.
most affected, with both experiencing a sudden Natural gas prices also soared in North America, as
demand rapidly outstripped supply, reflecting the
5. TheFreeTradeAgreementhasresultedinadramaticincreaseinCanadian
exports and imports as a per cent of GDPsince 1990, reflecting the expansion 6. OPEC, which produces about 40 per cent of the world’s oil, has announced
of same-industry trade in manufactured products. a target range of US$22 to $28 per barrel for its benchmark oil price.
BANKOFCANADAREVIEW • AUTUMN2001 23
Chart 1 Chart 2
Index of Consumer Attitudes Index of Consumer Attitudes
1991 = 100 1991 = 100
140 140 140 140
130 Ontario 130 130 130
Quebec Prairies
120 120 120 120
110 110 110 110
100 100 100 100
90 Atlantic Canada 90 90 90
80 80 80 British Columbia 80
70 1994 1995 1996 1997 1998 1999 2000 2001 70 70 1994 1995 1996 1997 1998 1999 2000 2001 70
Source: Conference Board of Canada Source: Conference Board of Canada
Chart 3 Chart 4
Employment Growth Employment Growth
Year-over-year percentage change Year-over-year percentage change
6 6 6 6
4 Ontario 4
4 Prairies 4
2 2
2 2
0 Quebec 0
0 0
-2 Atlantic Canada -2 British Columbia
-4 -4 -2 1994 1995 1996 1997 1998 1999 2000 2001 -2
1994 1995 1996 1997 1998 1999 2000 2001
Source: Statistics Canada Source: Statistics Canada
24 BANKOFCANADAREVIEW • AUTUMN2001
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